The Fine Art of House-Flipping

I heard a most interesting report on the radio today. Seems that in the US we are buying houses as "investments" and flipping those homes within a year, at a tidy profit.

It's certainly a good way to make some money at the moment! The housing market in many areas is very hot, and the increase in property values can be in the double digits in 12 months or less. However, it does have some long term concerns particularly if you can't carry the property without tenants, or the property can't carry itself through rent revenue.

Given that the Fed Chairman, Alan Greenspan keeps talking about putting interest rates up, housing prices are likely to either stop rising or "soften". At that point, buying a house as an "investment" is a long term proposition, as opposed to a short term one. Flipping only works as long as properties are appreciating VERY quickly.

Still, buying real estate is really quite smart as a long term investment, especially if you can rent the property. In effect, you end up building additional equity in the housing market, and someone else pays your mortgage for you. Now, there aren't too many places you can get a deal like that! (Take my word for it: I'm still waiting for my "sure bet" stocks to come back to the price I paid for them.)

Thinking about an investment property yourself? Be sure to check out our Home Buyers Checklist, to help you make sure that the property is really what you want. (You don't want your better half being suckered in because they "really like the place". You both want to be sure you know WHY you like the place.) You should also be checking your own finances if you want to buy as an investment: if for some reason you cannot rent your property, you will have to carry the mortgage yourself. You should have several months (at least 6) of rent in the bank, in order to get you over any rough patches.

Further, you need to be sure you have some spare cash even after buying the place, in case of unexpected repairs. Even the best homes can have something go unexpectedly wrong. As a property owner, you'll need to be prepared for that.

Other than that, I can't think of a single reason not to buy a property as an investment -- unless you need the money out of it FAST. If you do, you might want to consider some other kind of investment, like a money market fund or the like. While you won't get a high return on your investment, you will get back your capital plus "interest", and you can get it out quickly. That's not guaranteed with a property.

It's not just that the market could 'soften'. It's that sometimes when you try to sell, it takes more time than you'd think. If you need to get your money out quickly, this could be a challenge. Also, if you can't afford to risk your capital, investing in real estate is a problem. If the market does take a drop, you could lose your initial investment and perhaps even any equity that you've built in addition.

Do keep in mind that no investment is a "sure thing". (There's that stock I mentioned earlier...) Any time you put your money out to work for you in anything other than a "secured" investment, the possibility exists that it might not come back.